Pay-for-placement gets another shot

Idealab
founder Bill Gross, an Internet guru to many Netizens, thinks his pay-for-placement search engine dubbed Goto.com, to be launched Saturday, will change the advertising paradigm for Web searches.

But many industry analysts, executives, and consumers are skeptical. They point to another Internet company called Open Text
that tried a similar strategy
two years ago--but that project flopped. Search engine companies such as Excite
are taking a "wait-and-see" approach, but they do not plan to match the strategy for now.

"I think its going to be groundbreaking," Gross said. "We will build a full, real-time stock market for the bidding to begin. What we're doing is beneficial to the consumer."

As reported yesterday, Gross's search engine will rank Web sites based on how much the sites are willing to pay to be placed at the top of the search under a real-time competitive bidding process. By contrast, most search engines rank sites based on keyword density or some other mathematical formula.

Some familiar with Goto.com's plan--"buying your way up the food chain," as one analyst put it--argue that it will benefit both users and advertisers, and Goto.com is bullish that other search engines might follow suit.

Users are matched with sites they might want to do business with, similar to the yellow pages in telephone books. Advertisers reach a highly targeted audience and pay only for actual visits to their sites. Searches are sorted by price in descending order, based on what advertisers are willing to pay in pennies per click-through, according to a secret URL already posted on the Web.

But there is also a downside. Many Netizens do not want the search process more commercialized. They rely on search engines to perform research, similar to a trip to the library.

Open Text learned that lesson two years ago. In the summer of 1996, its search engine, Open Text Index, began selling Web sites a "preferred placement" on the page. The idea, akin to that of Goto.com, also was compared to phone company yellow pages. The company said it was responding to market demand for the feature.

It didn't work out, however. Consumers complained, and the company dropped the idea. "We got in so much hot water [with users] that we took it out within two to four weeks," said Mark Kraatz, manager of corporate Web systems for Open Text. "They thought it was tainting the search."

The company has since repositioned its business to focus less on the search engine and more on software products. "I guess it just was not accepted at the time, but it might be different now," Kraatz said.

That's what Gross and Goto.com are hoping. They think the Net has moved beyond a medium for technology enthusiasts and into the mainstream, where customers will like features that help them buy products.

In addition, Internet companies such as America Online, Excite, and
Yahoo
have shown that advertisers are willing to pay tens of millions of dollars to rent "real estate" on their Web pages for selling goods including flowers, books, cars, and computers. (See related story)

The GoTo home page features five categories: people, places, products, hobbies, and searches.

But analysts are skeptical about the strategy.

"It goes against the concept of search," said one prominent Wall Street analyst.

"It's an interesting idea that has the potential to change ad rates, but whether it will succeed or not is a much different question," said Kate Delhagen, an analyst with Forrester Research
who was briefed by Gross this morning. "If it stands any chance of succeeding, it will be the commerce players who make it happen."

Delhagen added: "I have questions about whether a consumer cares about this [model] or not."

Excite executives say they aren't worried. "It's kind of strange," executive vice president Brett Bullington said of the Goto.com strategy. "It's going to be interesting to see if it works. We haven't seen this work in the past."

While Goto.com could be a long shot, many Netizens are reluctant to bet against Gross. They point to his track record of building successful Internet companies. Idealab, formed in 1996, now has 26 businesses in different stages of "incubation," as the company puts it. They include CitySearch, eToys.com, and Shopping.com. Its investors include Goldman Sachs, AT&T, and Moore Capital.

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